Thursday, July 6, 2017

The Case for Cash

The Case for Cash

A dozen countries out of the 28 European Union (EU) members had legal limits on cash transactions in place at the end of 2015. Portugal, the country leading with these limits, had an EUR 1,000 legal limit on all cash transactions. Additionally, the discussion about introducing more of these limits is ongoing in almost all EU member states and recently, a new European Commission initiative seeking to introduce a compulsory EU-wide limit appeared.

The European Central Bank even phased out the production of the 500 euro note and Australia started seriously considering putting an end to the 100 dollar note in November 2016. There are also many rumors that Sweden is getting ready to abandon cash altogether.

The Risks

Being cashless is modern and progressive. You need an empty wallet to go with your Tesla, iPhone and neon handmade socks! An impression of a “race” is created. But looking closer, the reasons to hold on to cash have nothing to do with backwardness. Cash helps to mitigate risks, which will not disappear in a postmodern society:

Control. Transferring your whole financial life into a bank means parting with your own control over one aspect of life. Locking your accounts takes seconds. It doesn’t matter how rich you are or how big financial cushion you created. A simple bureaucratic mistake, a typo or a confusion of identification numbers by a bank, or a debt collector (not so unusual in Slovakia due to chaotic debt collection rules) can send you into deep financial problems overnight.

Middleman risks. Cash transfer is an immediate transfer of value between two parties. Electronic payments (with the exception of some cryptocurrencies) always involve a middleman and create a new layer of risk. The middleman has the power to override the payment in some cases and you cannot be sure if the transaction just conducted will really materialize.

Cushion against financial crises. You never really “deposit” money to your bank – you lend it. Without cash, you do not have the option to exit the financial system and its risk at least with some part of your financial assets. Rows of desperate people in front of ATMs in Bulgaria, Greece and Cyprus during the recent years proved that a collapse of a single bank, or a whole banking system, is still an option even in developed countries. In Greece, having a stack of cash in company’s safe often decided about the survival of business. A complete banking collapse is not the only danger to consider. Even a collapse of a single bank can inhibit a value transfer between two solvent business partners.

Privacy. Paying with a card is like showing your ID. Your bank account statement is like your diary – it shows how and when do you commute, what hobbies your kids have and what cosmetics your wife uses. Dubious government handling of private data on a large scale is a serious topic even in Western democracies.

In countries behind the Iron Curtain, the history of spying on its own citizens is long and rich. Even today, it is not that unusual for the ruling politicians to pull any kind of private data collected by state agencies to discredit their political rival. Of course, privacy issues do not include the government exclusively. Private subjects have troubles handling data from time to time as well. Let’s just name the Ashley Madison data breach, to make this text cheesier. In a cashless society you have the right not to purchase, or all purchases can and will be used against you!

Monetary experiments. There won’t be any safe haven to hide in from monetary experiments. Millions in Venezuela use US dollars to protect themselves against the plight of hyperinflation. But we do not need to rely on the notorious examples of Venezuela, or Zimbabwe. The majority of central banks around the world engaged in unconventional monetary tools since the crisis – negative nominal interest rates for example. In cash societies, (non-institutional) depositors have the ultimate backstop against this policy: withdrawing their money from bank accounts and hiding them in their mattress. In a cashless society there is no escape. Do you want to spend or save? That won’t be up to you anymore.

Social, cultural and psychological impacts. Money in form of cash has been an integral part of human society for several millennia in a fashion comparable to religion or art. One cannot expect to erase one part of the social puzzle and get easily predictable results. Cash helps some people to better plan their financial life and discourages debt.

Handling small sums of coins and notes develops initial mathematical skills in children. Money is an important social bridge and one of the key steps in social inclusion. Imagine the millions of Syrian and Iraqi refugees, often without any formal identity, not to mention a bank account, coming to a cashless Europe. Hidden rolls of euros and dollars are often their only source of power and influence over their own fate. Without cash, their ability to make any economic decisions would be reduced to zero. Even the dreaded shadow economy often serves as a last economic resort for minorities and marginal groups (like the Roma in Slovakia).

Basket of Eggs

Any form of value bears a certain amount of risks, including cash. “Don't put all your eggs in one basket” is the best investment advice one can get in life.

In many, or even most, everyday situations electronic money is safer, more comfortable and a much faster solution than cash. It is a vibrant world with revolutionary innovations unfolding in front of our eyes. However, cash is one of the best ways to manage your privacy, economic strategy, and the risks in your financial life.

Using cash is cumbersome and carries an irrefutable cost. But these costs should be compared to the benefits and we should look also on the tails of the risk curve. Financial collapse, dictatorship, war – that’s when the benefits of cash become obvious. A forced expulsion of cash from our society means a transfer of a whole dimension of life to the third party – financial systems and political authorities.

Such a decision requires a large amount of trust and should not be accepted with ovations, but with a thorough criticism and public discussion.